The effects of the U.K.'s vote to leave the European Union have been felt around the world. Markets are still looking to understand the political responses to Brexit in order to gauge the impact. With prices now more in the range of what we expected in a Brexit scenario, I want to provide a diversified and global list of opportunities with a three to six month time horizon. For investors seeking to protect and grow wealth over the long term, we continue to stress the importance of a multi-asset portfolio, well-diversified across regions, sectors, and asset classes.
Buy U.S. equities
Target upside by year end: +5-8 percent
The U.S. has limited direct export exposure to the U.K. (3 percent). U.S. companies generate about two-thirds of their revenues domestically and should benefit from the strength of the U.S. consumer. Solid labor income and the ongoing improvement in the housing market should support consumption, and the Federal Reserve is likely to keep policy relatively loose, so company refinancing costs should remain low. We will monitor U.S. dollar strength, but, on balance, we see the fall in U.S. equities as an opportunity, and remain overweight them in our global tactical asset allocation. We particularly favor stocks executing buybacks and/or paying healthy dividends.
Buy dividend-paying stocks in Europe…
Target upside by year end: +5 percent vs. euro-zone equities
Stocks across Europe were hit by the U.K.'s vote to leave the EU, including more defensive stocks that pay dividends. The 12-month-forward dividend yield on the MSCI EMU index is now 4 percent, 3.9 percentage points higher than German government bonds and close to an all-time high. We think that companies able to grow dividends should offer better total returns than the overall euro-zone equity market.
Target upside by year end: +5-8 percent
Asia-Pacific growth is only marginally affected by Brexit, and Asian equities are relatively cheap at present. Stocks with bond-like characteristics — high yields, low earnings growth risk, and strong free-cash flow — can perform well in an uncertain environment, in our view. We focus on high-dividend stocks in markets with the lowest government bond yields: Hong Kong, Singapore, China and Thailand.
Buy European high-yield credit
Target upside by year end: +3-4 percent
Direct exposure to the U.K. is relatively limited, and easy monetary policy and potential emergency measures from the European Central Bank (ECB) should help keep systemic concerns limited. We anticipate default rates remaining low (2 percent) thanks to modest economic growth and low corporate funding costs, and the ECB buying corporate bonds supports euro credit markets directly. After the sell-off, the yield stands at roughly 5 percent.
Buy gold miners' bonds
Target upside by year end: +8 percent
Gold miners should experience higher profitability due to a rising gold price and lower, mostly emerging market currency-denominated, costs. Bonds have an average spread of 4 percent, and due to limited bond maturities in 2016-18, cash accumulated will be used to tender for outstanding bonds. Bonds will likely benefit from safe-haven demand for gold itself, and we are bullish on the second quarter earnings season.
Long U.S. dollar vs. Australian dollar
Target upside by year end: +3 percent
We still believe that policy between the U.S. and Australia will diverge, and risk-off flows should support the U.S. dollar in the near term. We anticipate Australian growth drivers weakening further, with increased global uncertainty creating additional impediments to Australia's transition away from mining-led growth. We expect the Reserve Bank of Australia to cut interest rates by 0.25 percentage points in August, and the risk of further adjustments remains skewed to the downside.
Long Brazilian real vs. the euro & the U.S. dollar
Target upside over next three months: +3 percent
Expectations that global monetary policy will remain accommodative for longer should support selected high-yielding markets in coming months. The Brazilian real looks particularly attractive due to its double-digit carry rate, Brazil's improving growth-inflation dynamics from weak levels, and its positive adjustment on the external balance. Despite the risk of temporary setbacks (e.g. from domestic politics), we see potential for further compression in risk premia in the second half.